SG takes role in Chinese capital-guaranteed fund

Harvest Fund Management will use constant proportion portfolio insurance (CPPI) techniques to provide the guarantee and generate potential additional returns for Chinese investors. However, in a significant change to the guaranteed funds launched to date, a local bank, Shanghai Pudong Development Bank, will act as guarantor, while SG will be the counter-guarantor and monitoring agent. The other three funds launched in mainland China were all guaranteed by Chinese state-owned enterprises or trust companies.

“One of the attractions of the product is that you have Harvest as the manager and you have a local bank involved as guarantor for the first time, whereas all the other CPPI funds used non-banks as guarantor, such as a corporate or conglomerate,” said Raphael Blot, managing director, equity derivatives and structured products, at SG in Hong Kong. “Investors would prefer the guarantee of a local bank such as Shanghai Pudong, knowing that there is SG as the monitoring agent behind it.”

As monitoring agent, SG is responsible for providing technical assistance on the CPPI trading strategy, conducting due diligence on the procedures of Harvest, and analysing the limits and risks of the fund manager. However, SG will not be involved in the selection or trading of the underlying stocks and bonds, said Blot.

“We have agreed on the investment strategy the fund will have, and we feel comfortable that if the manager implements this strategy then the fund will be guaranteed at maturity,” he said. “As monitoring agents, we will monitor on a daily basis to make sure the policy we agreed is actively put in place, but we are not involved in the day-to-day management of the fund, ie stock and bond selection and buy and sell decisions.”

Harvest Fund Management follows on the heels of Tiantong Asset Management, which launched a three-year principal guaranteed fund in August guaranteed by the State Development and Investment Corp, the Chinese government’s investment arm. China Southern Fund Management launched the country’s first capital guaranteed fund in June 2003, guaranteed by China Investment Credit Guarantee, a joint venture of 20 Chinese companies; while Yinhua Fund Management followed in February this year with a CPPI fund guaranteed by Beijing Capital Group, a state-owned conglomerate.